Biotech Investment Is Booming in San Diego
February 15, 2022
Firms Invested Nearly $2.5 Billion in 2021
San Diego is firmly cemented as one of the top biotech markets in the United States. Life sciences companies and high-tech firms have driven new leasing activity across the region, accounting for 3.8 million square feet of leases in 2021, the highest level on record in San Diego, according to CoStar data.
That surge has been accompanied by record-high venture capital investment in the region, which reached $9.6 billion last year, according to Connect and PitchBook. That was nearly a 50% increase from what had been the previous record for funding in San Diego in 2020.
Following on the heels of biotech demand in the space markets, demand has increased in the capital markets in San Diego. Last year, investors traded almost $2.5 billion in biotech properties in San Diego, more than doubling the $1 billion investment volume seen in 2020, and a 70% increase compared to 2019.
Capitalization rates plunged to 4% on biotech deals at the end of last year, while the transactional price per square foot reached $470. Those deals last year comprised roughly 4 million square feet of space.
Alexandria Real Estate Equities was the top buyer in the past three years, investing $1.1 billion in area assets, primarily in the Torrey Pines and Sorrento Mesa areas. Alexandria Real Estate Equities was followed by Harrison Street Capital and Long Fellow Real Estate Partners, which invested $750 million and $720 million, respectively. Both firms largely concentrated their investment activity in the Sorrento Mesa area.
Sorrento Mesa is one of the hottest areas of San Diego for redevelopment. Investors have been actively buying dated office, flex and industrial buildings and campuses before converting them into lab space. The replacement cost for a state-of-the-art lab building is above $1,000 per square foot.
In the fourth quarter of last year alone, two deals closed for north of $300 million in Sorrento Mesa. Harrison Street Capital partnered with Sterling Bay to purchase eight flex and office buildings filled with tech and life sciences firms primarily in the Pacific Corporate Center along with developable land for $576 million from City Office REIT. The buyers intend to redevelop the site into high-end lab space, and it was one of the highest volume commercial deals in San Diego in 20 years.
Longfellow Real Estate Partners also added to its swelling local portfolio when the Boston-based firm purchased PS Business Park's Lusk Business Park in Sorrento Mesa for $315.4 million at the end of 2021. The flex campus sits on 21 acres and is expected to be converted to lab space.
Alexandria Real Estate Equities increased its portfolio in Sorrento Mesa when the firm purchased the five-building Lusk Mira Mesa Business Park from John Hancock Real Estate for $298.5 million. The deal presented the buyer with the opportunity to add another 400,000 square feet through ground-up development. Although the buildings were 100% occupied at the time of the sale, the public real estate investment trust is expected to redevelop the buildings upon the expiration of in-place leases.
And that momentum has already carried over into 2022. Canada-based Oxford Properties Group followed up a fourth-quarter deal in the Sorrento Valley for $87.3 million with a 13-building portfolio primarily concentrated within the Sorrento Mesa area in January for $464.3 million.
Perhaps the only limiting principle to continued soaring investment in Sorrento Mesa will be based on availability, and not demand.